1st Street Newsletter FEBRUARY 2009

Hello,

Welcome to 1st Street's monthly newsletter. If you require any assistance in obtaining the right loan for you, or if you have any questions in regards to an existing loan, please do not hesitate to contact me personally on 1300 88 01 09 or 0411 33 9998.

Kind regards,

Jeremy Fisher

Housing Affordability Hits 5-Year High

Interest rates down, extra Government help, and lower prices means housing is more affordable.

Increasing home loan approvals show many Australians are seeing the opportunities.

Big cuts in interest rates and the boost to the First Home Owners Grant pushed housing affordability conditions to the best level in five years, according to the latest HIA First Home Buyer Affordability Index.

The HIA report revealed a stunning increase of 39.2% in the December 2008 quarter. This means that, for would-be first home buyers in particular, conditions have improved significantly and clearly many Australians are taking up the opportunity to get into home ownership.

Over the December 2008 quarter the average home loan repayment fell by 26 per cent to $2,056 per month, significantly lower than the previous amount of $2,796.

Further reductions in mortgage interest rates in the first quarter of this year are expected to yield another improvement in housing affordability in the next report.

The official RBA cash rate, which drives home loan and other interest rates, has reduced by 4% since 1st September 2008.

Indications are that further rate cuts are likely, albeit smaller in size and less frequently than the five cuts of the past six months.

In addition, the latest figures from the Australian Bureau of Statistics (House Price Indexes: Eight Capital Cities December Qtr 2007 – December Qtr 2008) show a 3.3% decrease in the weighted average for house prices nationally. This will also be a factor in improving housing affordability.

The HIA report showed that affordability improved over the December quarter in all capital cities and regional areas, with the largest improvement occurring for Perth, Brisbane, and Regional Western Australia.

Mortgage stress reducing

This improvement in affordability clearly flows in to the amount of “mortgage stress”. Consumers are showing signs of financial relief, with 76% of Australians with a home loan saying that they are easily meeting their home loan repayments, up over 10% since April 2008, according to the latest findings of the Mortgage and Finance Association of Australia.

Economic modelling by the HIA backs this up, confirming that 135,000 households on mortgages have come out of mortgage stress since December 2008.

Previously a household would have to be earning in the order of $85,000 per annum to afford a modestly priced home without going into severe mortgage stress. The modelling shows that the improvement in housing affordability means those on a more modest income can now consider a home of their own.

More home loans

The improvement in affordability is also flowing through to the number of home loans as shown in the latest figures.

For the month of December total loans in Australia increased by 6.4% on the previous month. Loans for construction rose by 9.9% while loans for the purchase of new dwellings increased by 15.1%.

Looking at the figures in more detail, the number of loans for existing and new dwellings by state increased by:

  • 10.8% in New South Wales;
  • 5.2% in Victoria;
  • 5.9% in Queensland;
  • 10% in South Australia;
  • 5.1% in Western Australian;
  • 3.9% in Tasmania;
  • 3.9% in the Northern Territory; and
  • 3.1% in the Australian Capital Territory.

Stimulus package

The Government’s recent announcement of a $6.4 billion housing recovery plan, aimed at boosting the supply of new housing for both the public and community housing sector, is also welcome news.

It will help to generate an increase in the provision of public and community housing stock and in unlocking private construction projects, and will help not only the major cities but will also have a direct impact on regional economies.

Summary

The interest rate reductions, government assistance through the First Home Owner Boost and other measures, and the fall in house prices, have all contributed to housing being more affordable now than at any time in the last five years.

The number of home loan approvals has increased, showing that many Australians are taking advantage of these favourable conditions.

The Right Time To Fix?

With the recent interest rate reductions, a key question is whether or not borrowers should fix their home loan.

The answer depends on several factors, and is ultimately a personal decision.

Traditionally, Australians have always favoured the variable rate home loan. It was reported recently that some 80% of all home loans carry a variable interest rate. Interestingly, the USA and New Zealand are the reverse, where 80% of all current home loans are wholly or partly set with a fixed interest rate.

Whenever variable interest rates change, however, borrowers understandably review their options. And with interest rates at their lowest level for years, many people are wondering how much lower they can go.

If we are close to the bottom of the cycle, then fixing your home loan rate can appear an attractive option to lock in the lower rate – but it’s not always that simple.

So what are the main features of a fixed rate home loan?

Features

The most obvious feature is that the interest rate is fixed for a set period, typically between one and five years. At the end of this period the loan will normally revert to the standard variable rate product of the lender, although you can usually renegotiate a further term at the interest rates in force at that time.

Traditionally fixed rate loans have had fewer features than variable rated products. For example, they may not allow for extra repayments to be made. Also, to get out of a fixed rate loan before the end of the contract period is sometimes very expensive.

More recently, though, some lenders are making their fixed rate products more flexible. For example, in the past few years we’ve seen the expansion of split or combination loans. This is where a proportion of the loan is fixed, whilst the remainder is left as variable.

Benefits

The main benefit of a fixed rate home loan is certainty – the amount of the regular repayment will not vary for the period that the loan is fixed. For some people this is extremely important, and acts as an insurance policy or hedging against further variable rate increases.

For example, first home buyers or couples starting a family tend to be on a tight budget. Knowing that the repayments won’t go up for the next few years can provide peace of mind.

Also, people may be concerned about potential changes to their job or income level, and so would welcome the certainty of the repayment amount.

Similarly, property investors may also be seeking certainty on the costs of their investment. By locking in the interest rate and having a fixed rental amount coming in from the property means that much of the cash flow is predictable.

For some, they may believe that variable rates will increase in the future, and so are prepared to “bet” against this by fixing their rate.

Future Direction

However, unless you are an expert in money markets and the future direction of inflation and the economy, it is impossible to predict where interest rates will go. By fixing your interest rate you could therefore be locking into a rate higher than the average variable rate over the period that you’ve fixed for.

For this reason, many borrowers choose to fix for two or three years. Then, if variable rates do fall further or remain low, they are only locked in to paying a higher rate for a fairly short period.

Split Loans

Another way to “hedge your bets” is to consider a split or combination loan. This product allows you to have a fixed interest rate for a proportion of the amount borrowed, and a variable rate for the rest.

The split between the two is decided at the outset of the loan. Typically these splits are 50% to 70% fixed, with the remainder left as variable.

The benefit of this type of loan is that you get some of the advantages of each type of loan. You can have the flexible features of a variable rate loan and enjoy the lower cost when interest rates fall, whilst still fixing the interest rate on part of the loan as a hedge against increasing interest rates.

Wide Variations

There are hundreds of fixed rate products on the market and, as you’d expect, wide variations in interest rates and features.

For example, on a three year fixed rate home loan the interest rate “spread” is well over 1.5%, which can make a significant difference to the repayments. Also the range and flexibility of the loan features, and the size of the exit costs, vary greatly.

If you’d like to consider a fixed rate or split loan, then we can help you to compare the different products available. Please feel free to get in touch for a “no cost, no obligation” analysis.
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